Key Takeaways

  • A power of sale clause allows a lender to sell a property securing a loan without going through the court system if the borrower defaults.
  • This process, also called nonjudicial foreclosure, is generally faster and less expensive than judicial foreclosure but offers the borrower fewer procedural protections.
  • Procedures vary by state, including how much notice is given and the role of a trustee in managing the sale.
  • Advantages for borrowers can include avoidance of deficiency judgments in some states and the option to request judicial review.
  • Disadvantages include quicker loss of the property and limited opportunity to contest the foreclosure without filing a lawsuit.
  • Lenders may still choose judicial foreclosure despite having a power of sale clause, often to resolve title issues or obtain a deficiency judgment where allowed.

A power of sale clause is a stipulation included in most mortgages that gives the money lender the right to resell a property if the homebuyer defaults on the loan. This is so that the lender isn't stuck with debt from the mortgage.

What Is a Power of Sale Clause?

The power of sale clause, or power of sale provision, works similarly to foreclosure, but with less supervision by the court. Foreclosures also give the lender possession of the property, but require a court order from the state. When the power of sale clause is included in the contract, a lender can repossess the property in the case of default without legal intervention.

Power of sale repossession tends to be a speedier process than legal foreclosure, yet they accomplish the same thing. While a power of sale clause is usually quicker and easier than foreclosure, it does come with some potential issues.

Judicial vs. Nonjudicial Foreclosure

A power of sale clause is most commonly associated with a nonjudicial foreclosure, meaning the lender can foreclose without going through the court system. In contrast, a judicial foreclosure requires the lender to file a lawsuit and obtain a court order before selling the property. Judicial foreclosures tend to take longer and involve more legal fees but allow borrowers greater opportunity to contest the foreclosure in court.Even if a loan agreement contains a power of sale clause, a lender might still choose judicial foreclosure, especially if:

  • The title has legal defects that must be resolved.
  • The lender seeks a deficiency judgment in a state where it’s only available through judicial proceedings.
  • There are disputes over the validity of the security instrument.

Power of Sale Clause Process

The requirements for power of sale clauses differ from state to state, but usually the process follows a few basic steps. First, once a mortgage borrower has defaulted on their loan (misses payments) they will receive a notice from their lender letting them know that they've lost the property. This will come in the form of a limited notice of foreclosure by mail or it may be published or posted.

Once the notice has been posted or communicated somehow, a third party individual or company, called a trustee, will handle the process. The property will be sold by the trustee through a foreclosure sale.

Mortgage lenders need to be careful to obey the state laws regarding the requirements for notifying their borrowers of defaulting and foreclosures. States stipulate timelines and procedures to be sure that borrowers are aptly warned of impending foreclosures.

Notice Requirements and Timelines

The amount and type of notice a borrower receives before a nonjudicial foreclosure varies widely by state. Some states require both a notice of default and a notice of sale, while others permit a combined notice or even notice by publication and posting only. Timelines may range from as little as 30 days to several months, depending on state statutes.Lenders and trustees must follow these requirements precisely. Failure to comply with statutory notice procedures can delay the foreclosure or provide the borrower with grounds to challenge the sale in court.

States that Allow Power of Sale Clauses

You are allowed to use a power of sale clause in a mortgage or property contract in most states in the U.S. as a way of foreclosure.

The following 30 states usually allow power of sale clauses as foreclosures:

  • Alabama
  • Alaska
  • Arizona
  • Arkansas
  • California
  • Colorado
  • Washington D.C.
  • Georgia
  • Hawaii
  • Idaho
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • Nevada
  • New Hampshire
  • North Carolina
  • Oregon
  • Rhode Island
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • Washington
  • West Virginia
  • Wyoming

Power of Sale Clause Pros

There are some advantages to keep in mind for borrowers when it comes to power of sale clauses including:

  • Option for a judicial review
  • Deficiency judgment not allowed

Even though a power of sale foreclosure does not involve the court, a judicial review can be requested. Issues regarding the title or deed might need resolution from the court.

Deficiency judgments are not an option with power of sale foreclosures in some states. This means that if a borrower loses a property and the lender sells it, the borrower can't be held liable for costs not covered in the sale. For example, if a lender sells a foreclosed property for $60,000, but there was $80,000 of debt, the borrower can't be forced to pay the $20,000 difference.

Limited Legal Recourse for Borrowers

Because power of sale foreclosures bypass court oversight, borrowers typically have fewer opportunities to present defenses unless they initiate their own lawsuit. This can be costly and time-consuming. Additionally, in some states, minimal notice periods mean borrowers have little time to seek alternative solutions, such as loan modifications, repayment plans, or short sales.

Power of Sale Clause Cons

There are some disadvantages to the power of sale clause for borrowers as well. For example, the faster process means that borrowers who default on loans will lose their properties quickly. Foreclosures take longer, so a borrower might get a little more time in their home to figure things out.

Because there is no judicial review, if a borrower feels that they are being unfairly treated, they will only get a chance for a legal hearing if they file their own lawsuit, which is both expensive and time consuming.

Deed of Trust Needed

If a lender wants to use a power of sale clause for a foreclosure, they will need a deed of trust. This will put the property in a trust held by a trustee, instead of in the hands of the mortgage holder. So that trustee will actually resell the property in the event of a foreclosure. The property isn't in the hands of the mortgage holder during the sale, which means they can actually buy the foreclosed property.

Frequently Asked Questions

  1. What is the main purpose of a power of sale clause?
    It allows a lender to foreclose and sell a property without going through the court system when a borrower defaults.
  2. Does every state allow power of sale clauses?
    No. While most states permit them, the specific process and notice requirements vary, and some states only allow judicial foreclosure.
  3. Can a lender choose judicial foreclosure even with a power of sale clause?
    Yes. Lenders may opt for judicial foreclosure to address title defects or to pursue a deficiency judgment where nonjudicial foreclosure doesn’t allow it.
  4. How quickly can a property be sold under a power of sale clause?
    In some states, the process can take just a few months from default to sale, depending on statutory timelines.
  5. Can a borrower stop a power of sale foreclosure?
    Yes, but usually by curing the default, negotiating with the lender, or filing a lawsuit to contest the foreclosure—often under tight deadlines.

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